[BETA] Fortnightly

PURRED BY FLAT POWER DEMAND AT HOME IN RESIDENTIAL and industrial markets, U.S. utilities are taking huge risks in Latin America. Why? They are enticed by the promise of high-yield returns on generation, distribution and transmission deals.

Yet only some of the companies getting in on the ground floor of privatization or winning concessions in the Latin American energy market stand to make huge profits. Others, too slow to beat competitors, or not savvy enough to skirt political and regulatory land mines, could lose their shirts.

This much is clear: The markets will mature much more rapidly than they did in the United States. As the Latin American market story goes on, risks will rise, potential margins will shrink and ventures will fail. Nowhere is this scenario more true than in the copper mining region of northern Chile, where three utility groups are targeting a growing demand for electricity. Investments range from $440 million to $850 million.

Despite the risks, foreign investment units of U.S. utilities are staking billions in Latin America, long term. They're often more comfortable with the tradition of standard contracts and common languages there in Asia, with its less-robust market.

"The opportunities in Brazil are significant," says Bill Holden of Southern Energy Inc., a $400-million investor in the region. "There are some things that are going to happen in the next year or two that we will be very active at pursuing. There are also opportunities in Chile and Argentina¼ You will see more of an integration of markets in southern South America. You don't see [that] anywhere else in the world where privatization has been conducted on such a scale."

Scale means prolonged growth, analysts confirm.

"What the [U.S.] utilities are getting in Latin America is volume growth [population growth] that they can't get in the United States or in Europe,"says Sandra Boente, senior utilities analyst at Salomon Smith Barney's Latin America Equity Research office. "So overall, it's a very promising market. Even if the pricing in Latin America is mediocre."

Higher risks are driven by volatile markets, fuzzy regulations or more purely political variables. Risk also arises when foreign competition to get into a given market is heated. Then, a nominally lucrative investment can transform into a microcosm of the more mature home market.

The interests of the U.S. utility, of the local project sponsor and of the shareholders can be at odds, particularly when the project is a gamble. For example, while far-sighted U.S. utilities are investing billions in Chilean electricity, Boente warns shareholders that over the coming year they should "avoid the generators, avoid the sector, avoid the [Chilean] market."

Big electrical power developments in the region also make strange bedfellows of some U.S. utilities, which may assess risk differently at corporate levels. Southern Energy, for example, is regarded as a cautious, conservative investor in the region. AES Corp., of Arlington, Va., is seen as an aggressive, high-stakes player. Yet the two are partners in a $1-billion minority investment in Brazil's Cemig, in the state of Minas Gerais, the largest electric utility distributor in